Martin Feldstein to Fed: Gentlemen (and Women), Start Your Taper!

Martin Feldstein, chairman of President Reagan's Council of Economic Advisors, predicts quantitative easing will continue into 2014 — and perhaps beyond — unless Federal Reserve Chairman Ben Bernanke starts the taper on his way out the door as a valedictory gesture.

Feldstein is happy to stand up and be counted as a foe of continued quantitative easing (QE).

One is that Bernanke and other Fed leaders never intended to start cutting back the Fed's $85 billion monthly bond purchases in the first place.

A second possible reason for no taper is that Bernanke and other Federal Open Market Committee (FOMC) members were dismayed by how quickly long-term interest rates rose in anticipation of tapering, Feldstein noted.

Third, he suggested evidence of an economic slowdown was coming into focus, which put a yellow caution flag out for the FOMC.

Feldstein said if the central bank is waiting for signs of economic recovery before tapering, then it is unlikely to commence this year "because growth would have to accelerate to about 3 percent in the final quarter" — a scenario he apparently does not envision.

Still, Feldstein said there is one reason why "some small tapering" could occur in December: "Bernanke is scheduled to retire in January. Since he introduced the 'unconventional monetary policies' of QE and forward guidance, he might want to show before he steps down that he has put the Fed back on a path to conventional policies."

Feldstein called for a quick end to QE, on grounds the low interest rates it has produced "is driving investors and banks to take undesirable risks."

Writing in Forbes, contributor Nathan Lewis, an investment manager, said it should not really have come as a surprise the Fed has not started to dial back on its ultra-loose monetary policy.

"It looks to me like the Fed is hooked badly now. There's nothing more addictive than printing money," Lewis wrote.

Lewis noted that history is littered with governments that kept the currency printing presses going to manipulate their economies.

"Today, most everyone can see that government and large bank management is dominant in virtually every asset market. . . . These things tend to end badly."

Frank Fantozzi, chief executive of Planned Financial Services, told MarketWatch that the Fed's decision not to taper in September is more of a concern than the threat of a government shutdown is, and that it sent a "very bad signal."

"It's a self-fulfilling prophecy," Fantozzi said. "The Fed comes in and says the economy is not healthy. Well, if I'm a business owner, should I be hiring and spending?"